How to get your first mortgage

The biggest single purchase you make in your life is usually a home. Do you know what a mortgage is and how the calculation of what you can qualify for is made?

Purchasing a home usually requires outside financing from a bank, credit union, trust company or other private funding sources, such as the bank of mom and dad.

When you borrow money, the company or institution lending you the funds requires measurement of your ability to repay the loan or mortgage.

A mortgage is a loan that is secured by real property.

It is a legal contract that spells out both the rights and obligations of the lender and the borrowers.

The real property that secures the mortgage can be the home you are purchasing as well as other real estate you might own.

If you are borrowing the funds from a bank or credit union, the lender will normally require proof of your income by requesting copies of your most recent income tax returns or copies of your T4 slips showing employment earnings.

Copies of your notices of assessment may also be requested along with proof that any outstanding income tax balances have been paid to Canada Revenue Agency.

Lenders use two different ratios called TDS and GDS.

GDS stands for gross debt service and is a calculation that uses the total property cost, interest, property taxes, heating and any strata fees.

Canada Mortgage and Housing Corporation (CMHC) indicates this amount cannot exceed 35 per cent of your monthly income.

TDS stands for total debt service and includes GDS plus any other obligations such as lines of credit, car loans and credit card debt.

According to CMHC, the TDS generally cannot exceed 42 per cent of your total monthly income(s).

In short, lenders use these calculations to determine whether or not you can afford to pay for your prospective new home.

There are many websites that can help you determine what you can potentially afford.

Check out the mortgage affordability calculator at WhichMortgage.ca.

Be prepared to have current financial information at your finger tips when using a mortgage calculator.

Information includes your annual income, monthly living expenses, such as property taxes, strata fees and utilities, as well as debt obligations you might have, such as credit card debt, car or furniture loans or lines of credit.

If you have a down payment of less than 20 per cent of the value of the property, you require mortgage insurance.

The cost of this insurance is generally combined with your potential mortgage payment, but it is wise to know what the cost of this insurance is up front.

To make the cost of the mortgage and insurance more manageable, it may be worthwhile to postpone your home purchase until you have a larger down payment or look at properties that are less expensive.

Prospective purchasers certainly need to do their homework.

Look at your options for making payments, such as weekly or biweekly instead of monthly, length of term, locked-in or open.

Start your search for the right home and estimate the extra costs that accompany the home purchase.

Extra costs include property purchase taxes, mortgage registration fees, appraisal costs, insurance, property taxes, mortgage placement fees, strata and legal fees.

The total purchase price includes the down payment, mortgage and some of these extra costs.

Is there any help available for first time home buyers?

For your down payment, one source of funding to consider is your own RRSP (registered retirement savings plan).

The Home Buyers Plan (HBP) is a program that allows you, and your spouse, to withdraw up to $25,000 from your RRSP to buy or build a qualifying home.

A second program available is the First-Time Home Buyers’ Tax Credit (FTHB).

The government introduced a $5,000 non-refundable tax-credit amount on qualifying homes purchased after Jan. 27, 2009.

This provides $750 of federal tax relief for qualified individuals and is claimed on your personal tax return in the year your qualifying home is purchased.

If you need additional funds for your first home purchase, using your own RRSP might be one way of completing the deal without any immediate tax consequences.

Once you have made your home purchase, remember to claim your first time home buyers tax credit on your tax return.

Marion Wahl is a chartered professional accountant in Kelowna. Reach her at marionpwahl@shaw.ca.